Term Loans

Business Term Loan?

A business term loan is a lump sum of capital that you pay back with regular repayments at a fixed interest rate—this type of traditional financing is what most people think of when it comes to small business loans.

Generally, business owners use the proceeds of term loans to finance specific, one-off investments for their small businesses such as real estate purchases, business expansions, debt refinancing, and more.

Business Term Loan Details

Pros

• Set payment structure
• Suitable for a wide range of business purposes
• Term loans from online lenders can fund quickly
  with fewer requirements than traditional lenders
• Can be a great way to finance a larger investment
  while building business credit

Cons

• Potential prepayment penalties
• Shorter-term loans can be expensive
• Often require collateral or a personal guarantee

How Do Business Term Loans Work?

With a term loan, a small business lender gives you access to a lump sum of capital—which you then pay back, with interest and fees, over a set period of time.

Although your payment schedule will vary based on the type of business term loan and the lender you’re working with.

This being said, business term loans can be issued by banks, credit unions, and online lenders. In general, banks and credit unions will offer the most ideal rates and terms, but will also require top qualifications and will be slower to fund. Online lenders, on the other hand, will offer greater flexibility and faster funding times, but will likely be more expensive and have shorter terms.

Overall, in addition to a predictable payment schedule, one of the benefits of business term loans is that they can be used for a variety of business financing purposes.

You’ll find that these loans are often used for:

• Purchasing equipment or inventory
• Working capital
• Refinancing other business debts
• Hiring staff
• Meeting payroll or tax obligations
• Financing business expansions
• Purchasing real estate
• Funding general long-term investments

Business Term Loan Example

To get a better sense of how business term loans work, let’s walk through an example.

Let’s say you’re offered a term loan of $250,000 with monthly payments and a two-year term. The interest rate on this loan is 8% and you’re paying the lender an origination fee of 2%.

With this information, you can plug-in the numbers into a term loan calculator to estimate your monthly payments—as well as determine how much this loan will cost your business.

Overall, you’ll be making monthly payments of $11,306.82 to the lender with a total repayment of $271,363.75. The cost of this loan, therefore, is $26,363.75. In addition, you can also use these calculations to determine your APR, as opposed to the simple interest rate. If your interest rate is 8%, but you also have an origination fee of 2%, your APR will end up being higher than that quoted 8%.

In this case, the APR on the loan is 10.01%.